Precise identification of rightly priced stocks is the key to successful investing. However, it is not easy to distinguish these from toxic stocks, which need to be abandoned at the right time.
Overpriced toxic stocks are usually vulnerable to external shocks. Also, these stocks are burdened with a high amount of debt. The price of these stocks is artificially kept high. However, the higher price of toxic stocks is temporary in nature as it is higher than its true intrinsic value.
Investors may benefit from accurate identification of toxic stocks with the help of an investing strategy called short selling. This strategy allows investors to sell a stock first and then buy it when the price falls.
While short selling excels in bear markets, it typically loses money in bull markets.
So, figuring out toxic stocks and abandoning or short selling them at the right time is the key to protect your portfolio from big losses.
Here is a winning strategy that will help you to identify overpriced toxic stocks:
Most recent Debt/Equity Ratio greater than the median industry average: High debt/equity ratio implies high leverage. High leverage indicates a huge level of repayment that the company has to make in connection with the debt amount.
P/E using 12-month forward EPS estimate greater than 50: A very high forward P/E implies that a stock is highly overvalued.
% Change in F (1) and F (2) Estimate (12 Weeks) less than -5: Negative EPS estimate revision for this and the next fiscal year during the past 12 weeks points to analysts’ pessimism.
Zacks Rank more than or equal to #3 (Hold): We have not considered Buy-rated stocks that generally outperform the market.
Here are four of the 14 toxic stocks that showed up on the screen:
Live Nation Entertainment, Inc. (LYV - Free Report) is a Beverly Hills, CA-based live entertainment company. Over the past 30 days, the Zacks Consensus Estimate for current-quarter earnings declined from 23 cents per share to 22 cents. The stock currently has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Baltimore, MD-based WillScot Corporation (WSC - Free Report) is a specialty rental services company, offering modular space and portable storage solutions. Over the past 30 days, the Zacks Consensus Estimate for current-quarter earnings remained unchanged at 2 cents per share. The stock currently has a Zacks Rank #4 (Sell).
Farmington, UT-based Vista Outdoor Inc. (VSTO - Free Report) is engaged in developing, manufacturing and distributing optics, accessories and eyewear. Over the past 30 days, the Zacks Consensus Estimate for the current quarter remained unchanged at a loss of 8 cents per share. The stock currently has a Zacks Rank #4.
Covanta Holding Corporation (CVA - Free Report) is a Morristown, NJ-based alternative energy company that provides waste and energy services in the United States and Canada. In the past 30 days, the Zacks Consensus Estimate for the current quarter remained unchanged at a loss of 10 cents per share. The company currently has a Zacks Rank #3.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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